In the grand scheme of things – and despite valid industry complaints that mid-market portfolio companies could be saddled with a regulatory burden when they need it least – private equity can look at the proposed Directive on Alternative Investment Fund Managers and think it has got off lightly.
Released yesterday, the European Commission’s proposed regulatory regime for private equity and hedge funds operating in the European Union has been stoutly criticised by private equity firms as being potentially costly and pointless.
But as acknowledged by the European Venture Capital and Private Equity Association, private equity funds, by merit of the fact that they do not use leverage at fund level and their investors are typically locked in for more than five years, are being treated differently from hedge funds.
Private equity funds need to have €500 million under management before they fall under the directive, while other alternatives managers – namely hedge funds – only need €100 million.
The task force mandated by the industry to argue private equity’s corner in the regulatory debate had placed a lot of importance on the difference between the asset classes, and the Commission listened.
The contents of the proposed directive, broadly speaking, require private equity fund managers to register with a regulator, demonstrate they are operating responsibly in terms of risk management, outline what their funds will do and report in detail on the assets and markets to which their funds are exposed.
There is no talk of limiting a fund’s activity, just keeping the regulator informed. Given that self-regulation – regardless of how successfully it could have been implemented – was never going to be a viable option in the political environment, this can be considered the next best thing.
There may be costs involved in compliance, but – and this may not be a popular line to take amongst the mid-market community – is this level of portfolio company reporting not already in place for the sake of limited partners? It may not be cripplingly expensive to adapt this to standardised regulatory reporting.
There is still a lot of detail to be hammered out and the directive has yet to be debated in the European Parliament before being either passed or amended.
If the heavy hand of the regulator was an inevitability, and most feel that the political momentum behind this debate made it so, then private equity can count itself lucky. It could have been a lot worse.